carrying cost of inventory definition

This phrase has two connotations. One is the cost of holding inventory. In this case the carrying cost is the cost of capital tied up in inventory, the cost of storage, insurance, and obsolescence. Often this is expressed as an annual percentage rate, such as 20% of the cost of the inventory. This is used in the formula for determining the optimum ordering (or manufacturing) quantity of an item. See economic order quantity (EOQ) model.

Another connotation of this term is the cost at which the inventory is reported in the company’s general ledger accounts and on its balance sheet. To learn more, see Explanation of Inventory and Cost of Goods Sold for a discussion of the factors that determine the amounts at which inventory is reported.